When companies raise funds in global capital markets, they want to pay as little interest on their debt as possible.
One way of doing this is by putting up cash or assets as collateral to secure the borrowing (generally ownership interests in subsidiaries or property owned by these subsidiaries). For global companies, many of these assets are located around the world.
Many jurisdictions have different laws that govern the manner of protecting the rights of creditors in collateral. This makes things very complicated for a global company pledging assets in several countries. In these cases, a collateral agent specialist can be an attractive addition to their financing transaction.
As the rights of creditors in pledged collateral are usually determined by local laws, lenders typically require that a collateral agent be appointed in each jurisdiction in which collateral is located. Indeed, there has been an uptick in debt issuances by multinational companies, increasing the need for local collateral agents. Many banks that traditionally played these roles are less willing to provide the services in jurisdictions where they may not have staff, or are unfamiliar or uncomfortable in local law.
TMF Group's global presence allows it to fulfil an important role in financings where a multinational borrower pledges collateral to secure its borrowings.
The role of a collateral agent
Acting as collateral agent for a secured financing is usually a simple role, and generally involves accepting the pledge of the applicable collateral and enforcing rights against that collateral in the event of a default under the financing.
Depending on the type of pledged assets, the collateral agent may be required to take custody of the collateral. This is most common where the type of collateral is something in which a lien can only be effective if the collateral is in the physical possession of someone other than the borrower. In most cases, this collateral will consist of documents such as stock certificates, contracts or deeds, and the collateral agent may be required to take special care in holding the collateral.
In some jurisdictions, the collateral agent may need to be named as the secured party to make the lien effective. In that case, the local office may be required to sign documents governed by local law which create a lien and provide the collateral agent with the ability to exercise rights in the collateral (such as a foreclosure). In this situation, the collateral agent will need to retain local counsel - at the expense of the transaction sponsor or the borrower - to review these documents to ensure the collateral agent is not subjected to any unanticipated liabilities.
What happens when things go wrong?
If a default occurs under the financing, the collateral agent may be called upon to enforce rights in the collateral. The agent will do so only at the direction of the lenders or bondholders, and will be indemnified for the costs of enforcement, including counsel fees. Any proceeds (generally net of the agent's expenses) will be remitted to the lenders.
However, there should be minimal risk for an entity serving as collateral agent if the documentation is drafted correctly. The documentation should clearly provide that the collateral agent's duties are ministerial in nature, so that the agent exercises no discretion and acts only at the direction of the lenders. The documentation should also provide an indemnity of the agent for its actions (typically subject to the collateral agent's gross negligence or wilful misconduct), and should be clear that all costs of enforcement are covered by the lenders.
Sometimes, though, in some jurisdictions, liens may be difficult to enforce and may result in protracted litigation. Additionally, the collateral agent may not desire to foreclose upon certain some types of collateral for reputational reasons. Each appointment must be examined on a case-by-case basis.
TMF Group's role in multinational secured borrowing
TMF Group provides a one-stop-shop for collateral agencies in multi-national transactions, taking care of paperwork, local technicalities and other inconveniences. This streamlines the legal work required by the client and reduces their legal expenses.
For example, TMF Group recently closed a transaction where collateral is located in multiple jurisdictions, and TMF New York was retained to serve as a "Master Collateral Agent" and other TMF offices served as local collateral agents. In this capacity, TMF New York was the "face" of TMF Group to the transaction parties, and signed the New York law documents governing the transaction. The lenders, borrowers and other parties communicated matters affecting the collateral to TMF New York, which then dealt with the other local offices serving as collateral agents in the applicable jurisdictions. We recently closed one transaction in which TMF Group offices in 15 countries participated as collateral agents.
If you'd like to find out more about TMF Group's work as a collateral agent and how we can help you, get in touch with our New York experts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.